Kim Inc. must install a new air conditioning unit in its mainplant. Kim must install one or the other of the units; otherwise,the highly profitable plant would have to shut down. Two units areavailable, HCC and LCC (for high and low capital costs,respectively). HCC has a high capital cost but relatively lowoperating costs, while LCC has a low capital cost but higheroperating costs because it uses more electricity. The costs of theunits are shown here. Kim's WACC is 5.5%. 0 1 2 3 4 5 HCC -$600,000-$45,000 -$45,000 -$45,000 -$45,000 -$45,000 LCC -$100,000-$180,000 -$180,000 -$180,000 -$180,000 -$180,000 Which unit wouldyou recommend? Since all of the cash flows are negative, the IRR'swill be negative and we do not accept any project that has anegative IRR. Since all of the cash flows are negative, the NPV'scannot be calculated and an alternative method must be employed.Since all of the cash flows are negative, the NPV's will benegative and we do not accept any project that has a negative NPV.Since we are examining costs, the unit chosen would be the one thathad the lower NPV of costs. Since LCC's NPV of costs is lower thanHCC's, LCC would be chosen. Since we are examining costs, the unitchosen would be the one that had the lower NPV of costs. SinceHCC's NPV of costs is lower than LCC's, HCC would be chosen. IfKim's controller wanted to know the IRRs of the two projects, whatwould you tell him? The IRR of each project will be positive at alower WACC. There are multiple IRR's for each project. The IRR ofeach project is negative and therefore not useful fordecision-making. The IRR cannot be calculated because the cashflows are all one sign. A change of sign would be needed in orderto calculate the IRR. The IRR cannot be calculated because the cashflows are in the form of an annuity. If the WACC rose to 11% wouldthis affect your recommendation? Since all of the cash flows arenegative, the NPV's will be negative and we do not accept anyproject that has a negative NPV. When the WACC increases to 11%,the NPV of costs are now lower for LCC than HCC. When the WACCincreases to 11%, the NPV of costs are now lower for HCC than LCC.When the WACC increases to 11%, the IRR for LCC is greater than theIRR for HCC, LCC would be chosen. When the WACC increases to 11%,the IRR for HCC is greater than the IRR for LCC, HCC would bechosen. Explain your answer and the reason this result occurred.The reason is that when you discount at a higher rate you aremaking negative CFs higher and this lowers the NPV. The reason isthat when you discount at a higher rate you are making negative CFssmaller and this lowers the NPV. The reason is that when youdiscount at a higher rate you are making negative CFs smaller thusimproving the NPV. The reason is that when you discount at a higherrate you are making negative CFs higher thus improving the IRR. Thereason is that when you discount at a higher rate you are makingnegative CFs higher thus improving the NPV.